Pension Credits: What Are They And Are They Any Good?

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The Pension Credit guarantees a minimum level of income for everyone aged 60 and over but many are failing to claim their entitlement. Here's everything you need to know.

The Pension Credit is a means-tested entitlement which guarantees a minimum level of income above and beyond the basic state pension for everyone aged 60 and over. Credit payments provide a top-up for those on modest incomes. While this might seem like a valuable helping hand, the system is particularly confusing and has led Age Concern to cite that as one of the major reasons why six out of 10 lower income pensioners have been discouraged from claiming benefits which are rightfully theirs.

According to Age Concern almost half of all pensioners are entitled, so first of all here's a summary of the benefits the Pension Credit could offer you.

The first part of the Pension Credit system, known as the Guarantee Credit, secures an income of at least:

£119.05 a week if you're single or

£181.70 a week if you have a partner

If you or your partner is aged 65 or over and you have saved some money towards your retirement, such as a pension annuity, you may get extra Pension Credit known as the Savings Credit. This could be up to:

£19.05 a week if you're single or

£25.26 a week if you have a partner

Your income is taken into consideration when calculating your eligibility for the Pension Credit. Only certain types of income are counted (such as basic state pension, personal/occupational pension, certain benefits such as carer's allowance and earnings from a job).

Income from the attendance allowance, disability allowance, housing benefit and council tax benefit are specifically excluded. It's still worth claiming your entitlement for the Pension Credit even if you think it's likely to be fairly insignificant amount because it can help you claim for various other benefits. Additionally you may qualify for a greater amount if you are a carer or have disabilities.

So here's an example of how the Pension Credit works:

Example #1 - Under 65

You're aged between 60 and 64

You have no savings

You live on your own

You qualify for a basic state pension of £87.30 per week

Under the Pension Credit system you'll be eligible for a Pension Credit payment of £31.75 per week, raising your total weekly income to £119.05, the minimum for a single person.

Using the same example but this time with additional income of £20 per week paid from a personal pension, you'll be eligible for a Pension Credit payment of £11.75 per week, also raising your total weekly income to £119.05.

But this is where the problem lies. Despite the fact you have made enough provision during your working life to provide yourself with a pension of £20 per week, in these circumstances you'll lose £20 of the weekly Pension Credit to receive a top-up of just £11.75.

What I'm really getting at is why save for a small pension if you only lose out on an equivalent amount of Pension Credit payments and will then be no better off than the individual who hasn't made any pension provision at all?

By my rough calculations you'll need a pension fund of around £15,700 to provide an annuity of £20 per week (for a male aged 60, level income, no escalation, no guarantee). This seems to me like £15,700 effectively wasted and could be a huge disincentive to save for your retirement.

To overcome this hitch, at least partially, by the time you reach 65 you could benefit from extra Pension Credit if you have made some provision of your own. But there's still a snag. For every £1 of additional saving you make between the basic state pension and the Guarantee credit, you'll only receive 60p as an extra Savings Credit payment. Here's how it works:

Example #2 - Over 65

You're aged 65 or over

You have no savings

You live on your own

You qualify for a basic State Pension of £87.30 per week

And you have a personal pension which pays £20 per week

This time, you'll receive a Pension Credit entitlement of £23.75 per week giving a total income of £131.05. This breaks down as follows. You'll receive an £11.75 credit to bring your income up to the minimum level of £119.05 for a single person (i.e. £87.30 + £20.00 + £11.75).

But, because you are over 64, you'll also receive an extra Savings Credit which rewards the fact that you have saved for a personal pension. Remember for every £1 of additional saving you'll receive an extra credit of 60p. In this case since you saved up enough to receive £20 per week you'll get an extra credit of £12 (i.e. £20 x 60%). This will bring the total amount of Pension Credit you'll receive to £23.75 (i.e. £11.75 + £12.00).

Although this is an improvement on the position of anyone under age 65, you'll still lose some entitlement by accumulating a pension in your own right. Likewise, for anyone aged 60 and above, if you have capital, such as savings or investments, your entitlement is reduced by £1 a week for every £500, or part of £500, you have above £6,000. This limit is raised to £10,000 if you live in a care home.

Despite the obvious flaws in the Pension Credit system, it can nevertheless provide valuable benefits and you should contact The Pension Service to check your eligibility. The Department for Work and Pensions estimates that £2.5 billion worth of pension credits are left unclaimed each year so make sure you don't miss out too. You can apply up to four months prior to your 60th birthday. And don't assume you have already left it too late as you could be entitled to a backdated payment for up to twelve months.